June 1, 1999
E*Trade Is Expected to Announce
Stock Deal to Acquire Telebanc
By STEVEN LIPIN, REBECCA BUCKMAN and PAUL M.
SHERER
Staff Reporters of THE WALL STREET JOURNAL
E*Trade Group Inc., the online brokerage concern, is expected to
announce as early as Tuesday an agreement to acquire Telebanc
Financial Corp., one of the few online banking companies, in a
stock transaction valued at about $1.8 billion, according to people
familiar with the situation.
The combination is the first of an online broker with an online
bank, allowing Telebanc to link up with a fast-growing financial
player while giving E*Trade a less volatile revenue mix. It gives a
big boost to E*Trade's long-term goal of becoming an online
financial "portal" site, offering all sorts of financial services other
than plain-vanilla stock brokerage. E*Trade, based in Palo Alto,
Calif., already sells mutual funds, for instance, and has a deal with
online-mortgage provider E-Loan Inc. that allows E*Trade
customers to apply for home mortgages online.
The move comes as competition in the online-brokerage industry
continues to heat up, particularly with the splashy entrance of Wall
Street titan Merrill Lynch & Co. Merrill is expected to announce a
major push into Internet trading Tuesday, including a new
account that allows investors to trade stocks for just $29.95 (see
article).
Two months ago, E*Trade bought ClearStation Inc., an online
financial-advisory and discussion service. The Telebanc
acquisition, however, would be the first to move E*Trade into an
entirely new type of financial service.
Telebanc Financial, based in Arlington, Va., is the holding
company for Telebank, one of several Internet-based banks that
serve customers without using "brick-and-mortar" branch offices.
Since the banks don't have to pay for branches, they say they can
operate more inexpensively, pay higher deposit rates and charge
lower fees than traditional banks.
Telebanc's Rivals
Telebanc's Internet competitors include Net.Bank Inc. and
Security First Network Bank, a unit of Royal Bank Financial
Group. But the firm's biggest competition may be from traditional
banks, which may be one factor in its decision to sell. A handful of
companies such as Wells Fargo & Co. and Toronto-Dominion
Bank have been offering Internet banking for several years, while
others such as Chase Manhattan Corp. have recently been moving
to bolster their Internet presence.
The transaction also reflects E*Trade's willingness to use its rich
stock multiple to acquire other online financial concerns. E*Trade
trades at 13 times projected annual revenue, and is paying about
five times projected revenue for Telebanc.
People familiar with the matter say each share of Telebanc will be
exchanged for 2.1 shares of E*Trade, which translates into stock
valued at $93.45 a share. On the Nasdaq Stock Market Friday,
Telebanc closed at $66.50, up $4.25, or 6.8%. E*Trade closed at
$44.50, up $2.50, or 6%.
Though most online brokers offer some banking services, such as
bill payment and limited check writing, only one other company --
Royal Bank of Canada, which owns Bull & Bear Securities Inc. --
has tried to combine large-scale Internet banking and brokerage.
Royal Bank also owns Telebanc rival Security First Network Bank,
and Royal Bank is investing $29 million in beefing up Bull &
Bear's services, including links with Security First.
E*Trade's venture will likely be much more far-reaching.
E*Trade, one of the pioneers in the online brokerage business, has
more than a million customer accounts, and could gain even more
by marketing its online brokerage services to Telebanc's
customers. Telebanc's rates for checking and savings accounts are
also well above industry norms.
Diversifying Revenue Streams
Many online brokers are adding new services to diversify their
revenue streams, since most now depend heavily on stock
commissions. That revenue can fluctuate wildly according to
market cycles, while recurring, fee-based revenue, such as money
made off bank deposits, is more stable. E*Trade is ranked as the
second-biggest U.S. online broker as measured by trades a day,
with about a 13.3% market share at the end of the first quarter.
Charles Schwab Corp. is the leader, with 27.9%.
As of March 31, Telebanc had more than $2.6 billion in assets,
more than $1.3 billion in retail deposits and nearly 60,000
customer accounts. Revenue in 1998 was $107.7 million, up 70%
from $63.4 million in 1997. The company had a loss of nine cents
a share, or a total of $737,000, compared with a profit of $3.7
million, or 57 cents a share, in 1997. The loss stemmed from
higher marketing costs for customer acquisitions and
brand-building efforts, as well as the conversion of preferred
shares into common stock. Excluding charges relating to the
conversion, the company would have earned a profit of $1
million, or 13 cents a diluted share.
Telebanc predates the Internet era. In 1989, two attorneys
purchased a small Washington thrift for $5 million. They
eventually shed its branches and began operating it as a branchless
bank, offering service through automated teller machines,
telephone, fax, mail and the Internet.
With online banking, customers can view their account balances
and transaction histories and make transfers and payments over
the Internet. Payroll checks can be deposited directly, while other
deposits are mailed in. The downside for customers is that they
must withdraw cash by using the automated teller machines of
other banks, which usually require a fee.
The online banks lure customers by paying higher deposit rates
than regular banks. Telebank is offering a 5.4% annual interest rate
on a one-year certificate of deposit. On its own Internet site, Chase
Manhattan Bank advertises 3.87% or 4.11% for the same term,
depending on the account type.
But while high deposit rates are attractive for customers, for the
Internet banks they mean lower profits. Banks make much of their
profit by paying customers low rates on deposits and charging
higher rates for lending out the money. By offering higher deposit
rates, the Internet banks earn slimmer profit margins than
traditional banks. |
